from briefing.com, "Book It - Amazon.com Due For A Fall"
Daily commentary updated for March 03, 1998
Amazon.com's (AMZN) stock has had an amazing run. The stock recently broke out of a consolidation pattern and raced to a new all-time high at 79 5/8. Though the stock dipped a bit Monday on a negative article over the weekend in Barron's , Amazon's stock is up 26.6% year-to-date and an eye-opening 324% since it went public last May. While we are impressed by the stock's momentum, we question its valuations.
Good Story, Bad Price
Amazon.com quickly built a name for itself and staked out important territory on the Internet with key strategic deals. Sequential revenue growth over the past three quarters averaged better than 61%. Management deserves high praise for a strong business plan and a successful marketing campaign. But a good story doesn't necessarily translate into a timely investment.
At today's price the stock sports a market cap (total value of the shares) of $1.87 bln, or 79% of the value of Barnes & Noble (BKS) and 75% of the value of Borders (BGP). Now compare the sales and earnings totals of the three companies over the past twelve-months:
Company Sales Price/Sales Earnings P/E
Amazon.com (AMZN) $147.8 mln 109.2x ($1.17) n/a
Barnes & Noble (BKS) $2.7 bln 0.98x $0.82 42.4x
Borders (BGP) $2.1bln 1.4x $0.83 40.4x
* Sales and earnings based on trailing twelve-months.
Old Business, New Distribution
In the excitement over the growth prospects for Internet commerce it is important that investors not lose sight of the facts. Amazon is an Internet company, but it is also in the business of selling a simple commodity - books (and soon CDs). Amazon doesn't possess a new technology or a proprietary product, it is simplyusing a new distribution channel to succeed in an old fashioned business. Unfortunately, the competition, particularly Barnes & Noble, is adapting quickly to the new distribution channel. And as the Barron's article noted, Borders and Bertelsmann will soon join the list of Internet booksellers, thereby creating a very crowded field. While Amazon has pizzazz with the current Internet crowd, Barnes & Noble and Borders have well established name recognition with the the vast public that must become Internet book buyers if Amazon is live up to the promise of its excessive valuations.
In a commodity based business, pricing can fast become a problem. We see early signs of such trouble at Amazon.com. Barnes & Noble launched its web site with a 30% discount on its books. Amazon reacted by lowering prices. Continuous price wars are likely to be the norm in this business, especially with the new entrants. Given their large volume, Barnes & Noble and Borders may have lasting cost advantages because they can buy in greater volume.
Not a Question of Success, Just Valuation
None of this is to say that Amazon.com will fail. To the contrary, Briefing expects Amazon to be successful over the long haul. Nevertheless, we don't think that great potential and unquantifiable future profits are worth 79% of the nation's number one bookseller and 75% of the number two bookseller - especially when you consider that Amazon.com won't reach a comparable percentage of its key competitors' revenues for years to come - if ever. Add a lack of earnings visibility for the foreseeable future (FY98 estimate equals a net loss of $1.28) and pressure on margins from increased competition and the ingredients are in place for a sizable correction. Maybe not today and maybe not tomorrow, but soon. |
